Subchapter S and Subchapter C Corporations may be similar in name, but they have some key differences of which you should be aware. After all, how you set up your business will have a profound impact on how it is set up, taxed, and run. With such a foundational choice like how you want your business established, it is critical that you get informed on the different structures and the consequences of each.
Subchapter S Versus Subchapter C Corporations
While there are many differences between Subchapter S and Subchapter C Corporations, one of the biggest ones goes to how the two entities are taxed. Subchapter S Corporations are only taxed once as they have pass-through taxation. Only shareholders pay taxes on profits received from the corporations. So, shareholders report business income and losses on their personal tax returns. There is no corporate tax. Conversely, Subchapter C Corporations are taxed twice. At the corporate level, the business will pay taxes and the shareholders will also pay taxes on income received through dividends.
The two corporate structures are also formed in two different ways. C Corporations are the default corporation type. This means that, when you file articles of incorporation with the state, you will be designated as a C Corporation. In order to be designated as an S Corporation, you will need to complete and file Form 2553. This means that a C Corporation is easier to form. Its default status translates to less paperwork in order to form.
Another benefit of C Corporations is the fact that there are no restrictions on ownership. Anyone can be an owner in a C Corporation. There are also an unlimited number of shareholders allowed. In an S Corporation, there is a 100 limit on shareholders, all of whom must be U.S. citizens. The shareholder limit is one of the reasons that an S Corporation is often better for smaller corporations. In a smaller corporation, the full advantage of limiting the number of shareholders can be realized. With the limited number, shareholders have more of an opportunity to be involved in the day-to-day operations of the corporation. Employees can also be shareholders.
Subchapter S Corporations do have some other potential drawbacks that should be considered. While owners are not personally responsible for business liabilities, there are other downsides to this corporation type. For instance, owners are only allowed common stock. The continuous filings and fees needed for an S Corporation to stay in compliance can be frustrating as can the restriction in the management structure. S Corporations must have a board of directors. There are also strict requirements for record-keeping and holding meetings.
Alternatively, a Subchapter C Corporation allows owners to get preferred stock and are recognized internationally. C Corporations are usually the preference for investors and are often best if a company plans to go public someday. Owners are not personally responsible for business liabilities but have similar limitations to an S Corporation as there are filings and fees to stay in compliance, rigid management requirements (such as having a board of directors), and strict rules on holding meetings and maintaining records.
Business Law Attorneys
Do you want to learn about whether an S Corporation or a C Corporation is right for your business? Get trusted business law counsel from the team at Jones, Gregg, Creehan & Gerace. Contact us today.